Why don't in-house contractor prequalification systems work?
In all fairness, some in-house systems work very well. Smaller companies that only deal with a limited number of contractors at one location are often successful. Large companies that are willing to invest the resources needed can also have successful systems. The challenge is when a company has grown beyond the small in-house system and it’s no longer easy to verify the needed information (see The Case for Prequalifying Contractors and Suppliers to find out why your company should be doing it).
Many companies view maintaining a prequalification department as too expensive for the benefit gained. They usually fall back to setting standards that contractors should meet and charging their project management, safety, and purchasing teams with enforcing them.
If the company has more than one location, these standards may have been the work of an interdepartmental team. Each of the departments bring a particular concern to the table, and hopefully the standards are drafted with some input from each of them:
- Risk Management is involved in determining which types of insurance coverage will be required and the minimum levels that are acceptable
- The Safety department wants to see a track record of safe work, which is usually defined by the EMR (Experience Modification Rate), RIR (Recordable Incident Rate), and DART rate (Days Away, Restricted, or Transferred). They may also want:
- To know whether OSHA has cited the company and why
- A deeper understanding of how seriously a contractor views safety by taking a deeper look at its safety programs, policies, procedures, and training
- Project Management wants to know what the contractor’s capabilities are and its ability to deliver on a specific project
- Finance wants to make sure the contractor has the financial capability to deliver
- Legal wants to be sure that the contractor has agreed to a general conditions agreement or contract that protects and indemnifies the company
- Purchasing is often stuck with the task of trying to coordinate all these standards and find a contractor who can deliver at an acceptable price
So why do these systems fail?
The challenge usually comes from the way the information is collected. Because each department is asking for information that is relevant to their department, the tasks are typically assigned as a part-time task to someone in that department. Because of the complexity of managing larger operations, different company locations may operate almost autonomously. With these tasks delegated to individuals in each department, it isn't difficult to see that systems are likely to differ from location to location, resulting in disconnected silos of information and work processes.
If there isn’t a centralized database where all this information is collected, it becomes up to the project managers and purchasing team to determine whether a company “meets the standard.” Given that each group has their own challenges, without a well-defined and coordinated system in place, verifying compliance with corporate requirements can be hit or miss. Throw in employee turnover, lack of experience, and the fact that these are part-time tasks with all the efficiency and accuracy of a part-time effort and you have a recipe for failure. It’s not that the standards are wrong or that the individuals don’t care; it's that the system is too dependent on all the pieces falling in place at the right time. And, as always, Murphy’s Law kicks in, increasing the probability of failure.
However, when the prequalification process is centralized in one department with an in-house database, there is a higher probability of success. The challenge with this type of system is with the individuals who work there, or the workflow process. Once again, because of the diverse nature of the information collected, the team must either be very well trained or rely on people who have specialized knowledge to, for example, review a certificate of insurance or evaluate the reasons a contractor’s EMR is unacceptably high.
Also, if the in-house system doesn’t use technology to automatically remind contractors to update expiring documentation, human errors and omissions are inevitable.
The ability to store documents electronically for quick access is also essential. We know of one risk manager who spent 60 days searching for a signed master purchase agreement because it had been improperly filed. The agreement’s indemnity clause was critical to his company’s defense in pending litigation.
On the surface, it would seem that developing a solid internal prequalification system wouldn’t be that difficult. But audits of those systems generally reveal that—because of the challenge discussed above—compliance is less than 50%. Given today’s litigious world, it's important to ask ourselves, “Can we afford that risk?”
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